'A watershed moment' - total foreign ownership permitted in UAE
Law reform sees dozens of investors size up new possibilities in the Emirates, write Simon Rahimzada, Nabil Issa and Hamzeh Al Rasheed
This month is a watershed for international outfits thinking about investing in the United Arab Emirates (UAE). From 1 June, overseas investors have been able to establish and hold – for the first time – a 100% stake in UAE onshore companies across a variety of sectors.
The early signs are encouraging. In the first few days of the new law passing, the official Dubai Media Office claimed to have seen 59 international organisations express interest in full ownership of targets across a host of sectors, including luxury goods, transport and industrial. While time will tell how many transactions reach completion, there is clearly international appetite for investing in UAE assets.
The recent flurry of interest stems from reforms to the Commercial Companies Law (CCL), which have been three years in the making. The idea of liberation was first floated officially in May 2018 by the Cabinet of Ministers in the UAE. Back then, foreign nationals or companies faced certain restrictions when looking to invest in a domestic company. For instance, they were barred completely from certain sectors, such as defense, utilities and banking, which were reserved for UAE nationals and companies. In the sectors in which entrepreneurs could invest, they were prohibited from owning a majority stake in any onshore business and restricted to a 49% stake.
The UAE was keen to develop on the boom of inbound investment from recent years but the exclusions and/or requirement for a local Emirati co-investor to be the majority shareholder was perceived as a barrier to full entry. Foreign investments would often require utilising a UAE national as a de facto nominee shareholder to hold a majority stake, as well as various other legal agreements and contracts. The UAE had seen great success in “free zones” – specially assigned areas within the country that allowed 100% foreign ownership – so the authorities were keen to drive more inbound investment.
The UAE’s first step at liberalisation took the form of the Foreign Direct Investment Law (FDI Law) in September 2018. That law, in theory, allowed 100% foreign ownership by creating the “Positive List”, which was made up of 122 commercial sectors that would be open to investment. Examples included agriculture, education, healthcare, hospitality and logistics. Other sectors remained on the closed off on the “Negative List”.
However, the CCL was then amended in November 2020, effectively replacing the FDI Law with a new regime.
Under the new regime, the lists of permitted activities, which were published by Dubai and Abu Dhabi, now has more than 1,000 activities with no ownership restrictions. They span most industrial and trading business sectors, including hospitality and finance. However, certain vital business sectors remain excluded such as education, defence, publishing and telecommunication. The understanding is that the authorities in each Emirate has the discretion to revise and update its list of permitted activities at any time so certain sectors can move on, or off, the list.
The anticipation is that highly regulated activities (such as those regulated by the Central Bank or the Securities and Commodities Authority), including insurance services, banks, financial services and brokerage, which usually have a more stringent ownership restriction, will be excluded from the list. The UAE Central Bank, as an example, requires banks to be at least 60% locally owned.
The fact that each Emirate has the discretion to determine which business activities are permitted has resulted in certain key activities being open for foreign ownership only in some Emirates. For example, Abu Dhabi has included broader healthcare activities in its list of permitted activities including, for example, owning and operating general, ophthalmology, paediatric and gynaecology hospitals. Such activities are not specifically included on the list for Dubai. Moreover, Abu Dhabi has permitted onshore and offshore oil and gas fields and facilities services, whereas Dubai, again, has not. This activity is required to be held by entities to be eligible to act as a supplier for oil and gas companies in the UAE, such as ADNOC.
Such differences may encourage foreign investors to “Emirate-hunt” to potentially register their business, or re-domicile their existing business, to the Emirate in which the foreign investor can wholly own the business.
Despite some limitations in place, the move has been welcomed. However, there remain certain important considerations.
The new rules will be closely watched by businesses in the UAE that have implemented any side arrangements to mitigate the effects of the ownership restriction. Any such agreements should be scrutinised to assess the merits of terminating such arrangements within sectors that are now on the list of permitted activities.
Given the substantial changes to the ownership restriction, investors can expect more emphasis and policing of the UAE Anti-Concealment Law No. 17 of 2004 (the Anti-Concealment Law). That law prohibits foreign investors from carrying out business activities which they are not permitted to carry out in the UAE. A violation of the Anti-Concealment Law may result in a penalty of up to AED 100,000 being imposed on the persons involved and the foreign investor may also face deportation out of the UAE. If a violation is repeated, the penalty may involve imprisonment of up to two years.
Questions may also be raised about how this month’s liberation will affect the UAE’s very successful “free zones”. Those fearful of the future can be reassured that free zones will still be relevant in the UAE for various reasons, including (a) business activities that are not permitted activities; (b) the fact that certain free zone laws remain beneficial for financing and security purposes (i.e. the Dubai International Financial Centres and Abu Dhabi Global Market each have laws and registration systems that support the granting, and enforcement, of financing- and security-backed commercial transactions); and (c) enforcement of key provisions in shareholder agreements (e.g. tag and drag rights and put and call options, which are not as readily enforceable “onshore” in the UAE).
Last week’s update was an important step in further opening-up the UAE economy on the global stage. Initial indications show that dozens of investors are already looking at strategic purchases in the region. If activity continues to gather momentum off the back of the reforms, the hope is that the UAE will continue its journey as a prime destination for attracting foreign investment.
Simon Rahimzada is a partner in the Abu Dhabi office of King & Spalding; Nabil Issa and Hamzeh Al Rasheed are a Dubai-based partner and associate, respectively, at the firm